Bank of England successfully auctions 25 tons of UK gold

LONDON (CBS.MW) -- Against protests and a possible lawsuit from a jeweler in the south of England, the Bank of England auctioned off 25 tons of its gold reserves Tuesday, kicking off a plan to sell more than half of its gold over the next few years.

On its face, the auction appeared to go off without too much of a hitch. The BoE sold 804,000 ounces of gold to bidders at a price of $261.20 an ounce. The sale was oversubscribed by 5.2 times, which is usually a sign that interest was fairly high. Analysts also pointed out, though, that this could also mean that interest was high in getting the shiny stuff at cheaper prices, therefore many bids were offered.

The price of gold slid after the auction, though. Prices, which have been hovering around $262 in recent days, slipped through $260 and were fixed in London at $257.60, their lowest level since May 1979. In New York, gold futures were last trading at about $257.50.

The sale itself raised emotions in London, with one local jeweler trying to secure an injunction to stop the sale and the World Gold Council calling the sale a "disaster" and arguing that gold is still a valuable asset.

That may be, say analysts, but the BoE clearly views gold as having a reduced role in its banking reserves. And investors in general see few reasons to be hoarding gold at the moment.

A golden future?

Down the golden pipeline are further sales from the U.K., and likely sales from the International Monetary Fund and the Swiss government, although the IMF tried to calm fears Monday. See story.

The U.K. itself plans to sell 125 tons of gold this year and to ultimately auction off 415 tons of its gold, more than half of all its reserves.

This adds up to a lot of pressure on the upside for gold prices, said Martin Squires, precious metals analyst with Rudolf Wolff, whose firm believes gold is heading for $250 an ounce. "Most people say the trend is your friend and the trend is definitely down," he said.

While the auction was fairly well priced into the market, analysts said there were hopes that significant buying ahead of or after the auction would boost prices.

Kamal Naqvi, precious metals analyst with Macquarie Bank, said the big deal is that big institutions such as the BoE have joined such countries as Australia in selling of gold reserves.

"In the past, sales have been from the smaller holders of gold and the less significant nations who are less important on the world stage. Now we've got more significant players involved such as the U.K., the IMF and Switzerland. For those countries to be selling, it has to have significant impact on market symbolic," said Naqvi.

While other big countries have not started selling yet, Naqvi said the market fears a trend has been started. "Big central bank selling is hugely negative for gold."

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